As much as we would prefer a world where doctors could focus exclusively on addressing our health care questions strictly according to our highest interests, we know that reality is less rosy. Best intentions are often complicated by multiple parties, conflicting incentives and confusing costs. The more informed you are of any undisclosed motivations – who is compensating whom, and how – the better your choices can be when deciding to whom to turn for your family’s quality medical care.
The good news is that such advice does exist in the financial industry. But there are those who have vested interests in your NOT knowing the differences between best-interest (fiduciary) advice versus thinly veiled sales pitches. In addition, the legal disclosures describing those differences can be difficult to decipher, even for those who take the time to read the fine print.
Decoding Advisor Compensation Models
Bottom line, there are three ways financial professionals are compensated.
Fee-ONLY Advisors …
Are compensated solely by you, the client, in the form of flat fees, hourly fees or a percentage of your assets under management.Do not accept any third-party sources of compensation – no behind-the-scenes commissions or any other incentives from product providers.Report their fees transparently to you, so you can assess their worth in an informed manner.Disclose their fee arrangements in their “Form ADV,” a free, publicly available report in which investment advisors must disclose this and other standard regulatory information.
Fee-BASED Advisors …
Are compensated by you, the client, as described above; but they also can accept commissions and other third-party incentives from providers such as insurance agencies or mutual fund companies.Disclose their fee arrangements and the nature of any additional compensation in their Form ADV; however, the specific amounts and sources of commissions are typically unreported.
Commission-Only Broker/Dealers …
Receive 100 percent of their compensation in the form of commissions or other incentives, for brokering deals between you and third-party providers such as stock or bond exchanges, insurance agencies or mutual fund companies.Receive commissions that can take on many forms, such as fund loads, sales incentives, bond markups/markdowns and many others. Because these payments take place behind the scenes, you usually don’t know how much is being paid by whom, as compensation for what.Often represent big-name brokerage houses, banks or insurance companies offering “free” investment advice along with their transaction- and product-oriented services. Buyer beware, though. As we’ll explore below, that “free” advice may be costing you plenty while offering you less.
Fee-Only versus Commissioned Advice
Because you pay no direct fees to a commissioned broker/dealer for his or her advice, it may seem as if you are receiving something for nothing. But it’s critical to understand that regulators consider broker/dealers’ financial advice as secondary to their primary transaction- based role. Commission-based advice is thus not regulated according to the same, highest fiduciary standards to which fee-only advice is held
Instead, while commissioned-based advice must be suitable for your circumstances (i.e., not grossly inappropriate), it may well cost you significantly more than is necessary to accomplish your personal goals. In other words, you’re likely still paying for that “free” advice in the form of opaque, behind-the-scene commissions, except it’s impossible to know how much you’re paying, how it’s happening or whether the advice is truly worth heeding.
Our Prescription: Fee-Only Advice
No matter what your level of income or net worth, when it comes to your financial well-being, you have options when hiring a financial advisor. Just as you would rather not settle for mediocre medical care, you should not settle for investment advice that is merely suitable. Seek out a fee-only financial advisor whose loyalties belong to you (because you are his or her sole source of compensation), whose interests are aligned with yours, and whose fiduciary objective is to help you achieve your highest financial health.
